October 05, 2017

Here’s how small businesses can survive a hurricane

A recent story from Houston Public Media provides an interesting look at the various ways hurricanes can impact local businesses. The story follows Anastasia Gentles, cofounder of NightLight Pediatric Urgent Care, in her attempts to rebound from serious business damage when Hurricane Harvey pummeled the Houston, Texas region.

For background, NightLight is a small medical business with seven locations in coastal Texas. The company’s top location is situated in a strip mall that was “turned into a lake” when Harvey hit in late August. There was water up to the ceiling, and mold took over afterward. The business location was shut down indefinitely.

This is an extreme example of how a hurricane might impact a small business, but it’s useful for understanding the pain points and how to protect against them. Let’s take a look at what happened and what can be learned to reduce risk.

Destruction of physical property

The most obvious affect of a hurricane is damage to the physical business. Since many SMBs are brick-and-mortar companies, this is a significant concern.

In NightLight’s case, the damage was total. In Harvey’s aftermath, workers were forced to “(strip) the office to nothing but its stone walls, glass windows and metal frames,” according to the HPM report. Initial estimates for reconstruction were $300,000.

That’s a lot of cash, but thankfully most of that will be covered by flood insurance in NightLight’s case. Unfortunately, most SMBs don’t properly insure themselves against the threats they consider most damaging to their business. As we recently wrote, floods, fires, and natural disasters are perceived as some of the most damaging threats to small business owners, but you wouldn’t know it from their insurance.

In deeper analysis of preparations against threats, we isolated respondents from our national survey of SMB owners who said a natural disaster would be “extremely damaging” to their businesses. Here’s what we found:

27% would last less than 1 month if sales stopped, and 78% less than 6 months

55% have overcome a natural disaster that impacted their business in the past

Yet only 28% have disaster insurance, and 23% have business interruption insurance

These companies are at high risk of shutting down if a major weather event caused flooding, fire, or other significant damage to their businesses. To boot, many of them have experienced similar threats in the past. Nevertheless, their threat mitigation preparations aren’t in line with how they evaluate risk, particularly considering their financial exposure.

Local businesses in areas prone to natural disasters should insure themselves against those risks. Otherwise, they’re probably a storm away from losing their livelihoods.

Loss of sales revenue

In NightLight’s case, the biggest challenge was business stoppage. Gentles told HPM the Humble, Texas branch generated about a quarter of the company’s total revenue, but “(t)hat revenue has been missing for weeks now because it’s taking a long time to rebuild the Humble office, in part because contractors have been in high demand after Harvey.”

All told, it could take 3-6 months for NightLight to rebuild its Humble office; meanwhile, the company loses revenue every day. This is a problem because SMBs are highly sensitive to gaps in cash flow. We polled 2,300 local business owners in all 50 states to see how long they’d survive if sales stopped entirely. Here’s what we found:

In summary, NightLight’s office closure puts the business at high risk because 3 in 4 small businesses nationally would shut down within 6 months if sales stopped entirely. In addition, we found that saving more money is the top action respondents were planning to take in the next 12 months to safeguard against threats — 77% said they’re putting more cash in the bank just in case.

Another solution is to purchase business interruption insurance, which provides cash flow in the event of a stoppage. Precious few SMBs have this type of insurance. Take a look:

Silver lining: most SMBs bounce back fast

If it seems like hurricanes are a guaranteed death-knell for SMBs, think again. Despite the risks to physical property and revenue, stories like NightLight’s don’t reflect the norm. In fact, as we reported yesterday, most small businesses lick their wounds and rebound very quickly after big storms hit.

We’re rooting for every small business to rebound from Hurricanes Harvey and Irma. For any business owner in a hurricane-prone area, take a few simple steps to ensure you protect your livelihood.

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